The Blues landscape is a swirl of activity as the nation's 62 independent plans struggle to remain competitive in today's managed-care environment.
Collectively, Blue Cross and Blue Shield plans serve 66.3 million people in widely differing markets. Although the plans have unique cultures, they're merging, affiliating in consortia, creating for-profit subsidiaries and converting to for-profit status.
To borrow from the Oldsmobile slogan, these are definitely not your father's Blues plans
Consumer advocates and industry observers say the rash of Blues conversions is siphoning billions earned as taxpayer-supported companies into executives' and investors' pockets-money that belongs in the communities the plans serve.
In the most radical proposal to date, Blue Cross and Blue Shield of Ohio plans to transfer most of its business to Columbia/HCA Healthcare Corp., a move consumer advocates argue is a for-profit conversion. The $300 million deal would provide a $19 million windfall to Blues executives.
But Pat Hays, president and chief executive officer of the Chicago-based national Blue Cross and Blue Shield Association, said the proposed Ohio transaction "is radically different from everything else the Blues are doing. It's an aberration among all the transactions."
The association says it will revoke the Ohio Blues' license if it proceeds with the deal as structured. The national group is upset because Columbia's plan is to continue its brand identification and not the Blues', and, as the transaction is structured, the Ohio Blues is left virtually without a business.
Although five Blues plans have converted to for-profit status or announced conversion plans, most Blues plans won't follow suit, Hays predicted. "The majority of the Blues plans are committed to their not-for-profit heritage and are doing an amazing variety of innovative things to preserve that heritage," he said. Unlike the Ohio plan, others that are converting have involved the national association in the decision and have received its blessing.
The plans that are converting are feeling the heat from for-profit rivals and see no alternative to going public, he said.
The plans say going public gives them easier access to capital markets in order to expand, compete with for-profits and continue to provide affordable coverage. Several converting plans propose to set up charitable foundations and one-Blue Cross of California-already has done so.
But consumer advocates say the Blues will jettison their social mission as they become for-profit companies. The Blues already are distancing themselves from that mission, they say.
"It really is unfortunate. The Blues are a necessary counterforce to the for-profits" in the marketplace, said Jay Constantine, chief health staffer of the Senate Finance Committee from 1968 to 1981 and a former research analyst with the national Blues organization.
Before competing managed-care plans forced Blues plans to become selective in enrolling people, the insurers "generally took greater risks," Constantine said. Many plans had open enrollment periods and would insure everyone who could pay the premiums, even those with pre-existing conditions, he said.
When Blues plans began to medically underwrite in 1986, Congress removed their federal tax exemption. Still, many plans consider it their mission to extend coverage as much as they can.
When Blues plans go for-profit, "their virginity-such as it was-is absolutely lost. They are no better and no worse than anyone else" because their history is lost, Constantine said.
Historical roots. Hospitals established Blues plans as not-for-profits in the 1930s to ensure that patients would have the means to pay for care. For years the plans enjoyed regulatory and tax exemptions because of their social mission.
Until payers, patients and enlightened providers accepted the need for cost control, the Blues ruled the healthcare finance roost. "It was occasionally remarked within Blue Cross claims departments that their mission was not to figure out how to reject the claim but to figure out how to pay it," said HMO analyst Doug Sherlock, whose father was president of Blue Cross and Blue Shield of Maryland.
"Among providers and patients, Blues had been viewed as a generous payer of claims. They weren't as sticky, didn't raise such a fuss when the patient needed care," Sherlock said.
But Blues officials say the spotlight on the conversion of a few plans has distorted the overall picture. Overshadowed in the controversy, they say, is the wide range of strategic activities Blues plans engage in to remain competitive as not-for-profits.
Among the 62 plans, only two have completed the conversion to for-profit status and issued stock-Blue Cross of California's WellPoint Health Networks and Blue Cross and Blue Shield of Georgia. Of those, only WellPoint is publicly traded.
After the national Blues association authorized plans to convert to for-profit status in June 1994, only the Georgia plan moved quickly to do so. California had begun its conversion in 1993. In the past year, Blue Cross and Blue Shield of Colorado, New York's Empire Blue Cross and Blue Shield, and Virginia's Trigon Blue Cross and Blue Shield have started the conversion process.
Three other plans have owned publicly traded managed-care subsidiaries for some time: Blue Cross and Blue Shield of Wisconsin created United Wisconsin Services in 1991; Blue Cross and Blue Shield of Indiana created Acordia, a health insurance brokerage, in 1992; and Blue Cross and Blue Shield of Missouri started RightChoice Managed Care in 1994.
Other plans have formed wholly owned for-profit subsidiaries-offering a spectrum of products from life insurance to third-party administration-that aren't publicly traded. Several other plans, such as the Maryland Blues and Blue Cross and Blue Shield of Kansas City (Mo.), have been trying to establish for-profit subsidiaries.
The question, according to Judith Bell, director of the West Coast office of Consumers Union, is whether the plans are using these subsidiaries to test the conversion waters.
For example, Empire earlier this year created two for-profit subsidiaries. Soon thereafter, the company announced it planned a full conversion.
Mergers before conversions. Bell believes the spate of Blues affiliations and mergers are also steps toward conversions. Business consultants agree. "We study this across various industries," says Tom Prchal, a partner with Andersen Consulting's central region health management practice who works with 15 Blues plans. "Consolidating alone will get you some efficiencies. But if you have a number of organizations going after the same market, at one point some will figure out they need more capital to get a better mousetrap," meaning a better healthcare product, he said.
Prchal said conversion to for-profit status, which allows companies to sell stock, is the way to get capital to invest in information systems and new products.
According to the national association, pending mergers include the Illinois Blues with the Texas Blues; Blue Shield of Pennsylvania with Blue Cross of Western Pennsylvania; Blue Cross of Northeastern Pennsylvania with Capital Blue Cross, Harrisburg, Pa.; the Colorado Blues with the Nevada Blues; and Indianapolis-based Anthem with the Connecticut Blues.
The possibility that most Blues plans are moving toward conversion has sparked fears that healthcare will be dominated by Wall Street and a bottom-line mentality. That means less of the healthcare dollar will be spent on medical care and more on administrative costs and profits, advocates say.
Collectively, Blues plans spent only 11.2% of premiums on administrative expenses in 1995, a spokeswoman said. That compares with up to 25% for some commercial insurers and HMOs.
"There's a lot of paranoia out there," countered J. Alexander McMahon, president of the American Hospital Association from 1972 to 1986 and of Blue Cross and Blue Shield of North Carolina from 1968 to 1972. McMahon now teaches at Duke University's Fuqua School of Business. Each plan does what it needs to do to remain competitive in its market, McMahon noted. "Some very peculiar kinds of things are leading some plans in the direction of for-profit," he said. For example, plans in heavily regulated states may feel they need to convert in order to gain flexibility. And some plans also may need to convert in order to raise capital, he said.
"There's no movement (toward conversion) here in North Carolina because regulation is not oppressive and we've got plenty of reserves and good borrowing capacity," he said.
Scott Serota, executive vice president at the national Blues association, agrees that the intense affiliation activity is not a sign that more plans will convert.
And, because each plan is governed by different bylaws and state regulations, each conversion is different. "If you've seen one conversion, you've seen one conversion," Serota joked.
Countering the fears of consumer advocates, Serota said: "I don't think (conversion) fundamentally changes . . . the way plans operate. It's a financing, not an operating question. I don't see their behavior change materially once they convert."
James Lott, senior vice president at the Healthcare Association of Southern California, agrees. "I don't see any difference in the behavior of for-profit or not-for-profit plans," he said. While Blue Cross of California's behavior "changed dramatically" since it went public, with the plan creating a two-tiered hospital system based on "predatory pricing," the insurer was simply responding to employers' pressure on HMOs to cut prices, Lott said.
Tale of two conversions. The strategic goals of converting Blues plans differ vastly, as illustrated by the California and Georgia plans that have completed conversions.
Blue Cross of California's conversion, completed earlier this year, took three years and involved a pitched battle with state regulators and legislators.
California law requires converting companies to donate their fair value to charity. In 1993, Blue Cross of California officials maintained that creating the WellPoint Health Networks for-profit subsidiary was a "restructuring" and not a conversion and that Blue Cross didn't owe the public anything. After pressure from regulators, Blue Cross established two charitable foundations worth $3 billion. Blue Cross executives received no profit relating to the deal, although an initial plan contained executive stock options, said Consumers Union's Bell.
Leonard Schaeffer, WellPoint chairman and CEO, has embarked on an aggressive expansion that includes planned acquisitions of other insurers , Blues plans and other business affiliations with Blues plans. WellPoint already has acquired the group health business of Massachusetts Mutual Life Insurance Co. for $380 million and is reportedly in talks with John Hancock Mutual Life Insurance Co. about buying its health insurance plans.
"We are viewed . . . as more aggressively getting into managed care. We have developed systems and products that Blues and others are aware of. There's interest in allying with us at a variety of levels," Schaeffer said.
He added that the company is seeking more "substantive" business relationships with other Blues plans rather than linking with them through a consortium.
In contrast, the Georgia Blues went through a quicker process. Last year, the Georgia Legislature passed a law allowing the plan to become a for-profit, and the insurance department authorized the restructuring. In February, Cerulean Co., the holding company for the Blues plan, secured an initial private investment of $49.9 million and issued stock.
About 144,000 Blues subscribers were offered five free shares of stock as part of the conversion. The stock isn't publicly traded. No plan executive or board member received stock in the deal.
The Georgia plan wasn't required to establish a charitable foundation because the state Supreme Court ruled in 1960 that the company was taxable. The plan's assets are not public, said Neil Vannoy, executive vice president for community operations. The plan paid state and federal income taxes of $3.4 million in 1995, according to Georgia Blues documents.
"The horse is out of the barn on that one," Consumer Union's Bell said. "Georgia is an example of what an insurance commissioner should not do" in reviewing a conversion plan.
Similarly, in 1994 Missouri's insurance commissioner authorized the state's Blues plan to create RightChoice, a for-profit publicly traded subsidiary. Subsequently, the insurance department tried to get a state court to rule that the plan had a charitable obligation in converting. But in September the court ruled that the Missouri Blues had no charitable obligation because it was not organized for charitable purposes.
Unlike WellPoint's focus on acquisitions and growth out of state, the Georgia plan wants to use new capital to increase access to primary care in underserved areas of Georgia and to further develop its local healthcare partnerships or integrated delivery systems, Vannoy said. The Georgia plan's mission, according to its annual report, is "to provide access to quality, affordable healthcare for as many Georgians as possible."
Despite the differences, Bell points out, "the general principle" in conversions is the same. The Blues plans "were established as nonprofits because of their public mission. They are essentially owned by the public, and the public should get the money. It shouldn't go to private individuals or be used as seed money for for-profit ventures," she said.
As exhibit No. 1 of taxpayers being shortchanged, Bell pointed to Columbia's deal with the Ohio Blues, with the for-profit healthcare giant receiving most of the plan's assets for an "inadequate payment" of $300 million and $19 million going to plan executives.
In contrast, Bell praises Colorado law, which governs the planned conversion of the state's Blues plan.
"We agreed from the outset that 100% of the stock of the company would go to an independent foundation," said Carl Miller, spokesman for the Blues plans in Colorado, Nevada and New Mexico. Those plans affiliated and in 1987 created Rocky Mountain Healthcare Co., a management company.
Miller said conversion would likely lead to further consolidation. "We have always envisioned a regional Rocky Mountain health plan," he said.
When announcing mergers and planned conversions, Blues plans invariably cite the need for cash to compete with giant for-profit managed-care companies. Blues plans say rivals are entering their markets with more attractive products and more cash to invest in the complicated infrastructure needed to support managed care.
The deals are becoming more convoluted-such as the planned combination of plans in Delaware and New Jersey with Anthem, a giant healthcare management company in Indianapolis that had fiscal 1995 revenues of $6.1 billion. Doing business in three states as Anthem Blue Cross and Blue Shield, Anthem owns publicly traded Acordia, one of the first Blues subsidiaries to go public.
In the proposed combination, the New Jersey Blues would buy the Delaware Blues, and Anthem would later buy that combination. Only $103 million would be earmarked for a charitable foundation by the Delaware plan, Bell said.
Because of the confusing array of deals, Consumers Union has made it a priority to keep regulators and consumers in various markets up to date on developments elsewhere so they can be ready to protect public assets when conversions are proposed, Bell said.